IKEA India Plans Give Scant Reassurance to Foreigners

A year ago, India’s government allowed foreign stores
selling a single brand -- think Ikea and Inditex SA’s Zara -- to
enter a $420 billion retail market with longstanding
restrictions for outsiders. Then in September, India said
multibrand retailers such as Wal-Mart Stores Inc. and Carrefour
SA were welcome to open shops with local partners.

The number of stores foreigners have set up independently
so far: Zero. And only four international companies, all of them
single-brand chains, have applied under the new rules.

Though Commerce Minister Anand Sharma says Ikea is poised
to win approval to bring its colossal furniture outlets to
India, analysts say the protracted negotiations it has endured
will slow efforts to draw foreign investment to retail. The
government hasn’t specified when it might approve Ikea’s plan.

“There’s too much bureaucracy in India,” said Taina
Erajuuri, a fund manager at FIM Asset Management Ltd. in
Helsinki, who invests in emerging markets including India. “The
regulatory work has to be improved to attract” foreign chains.

Ikea, the home furnishings giant founded by billionaire
Ingvar Kamprad, has said it will invest about 1.5 billion euros
($2 billion) to expand in India. Without providing a timeline,
Ikea says it plans to open 25 stores in the country. Kamprad is
ranked fifth with a net worth of $43.5 billion on the Bloomberg
Billionaire’s Index.

Swedish Meatballs

The company first applied in June, only to face government
opposition to sales of products including textiles, apparel,
fabric, electronic items, toys and books, according to reports
in the Economic Times. And the government wanted to restrict
Ikea’s cafes, the newspaper reported. The company considers
these outlets, which sell Scandinavian specialties such as
meatballs, an essential part of its retail experience.

The furniture retailer is “able to bargain because they
are the first,” said Arun Kejriwal, director at Kejriwal
Research & Investment Services Pvt. in Mumbai. “If they succumb
to any sort of pressure this time, they may not get clearances
for anything else.”

Ikea spokeswoman Nivedeeta Moirangthem declined to respond
to queries about the Economic Times report or the company’s
bargaining position because the approval process is ongoing.

French Cookware

Prime Minister Manmohan Singh’s government last January
passed regulations that allowed single-brand companies to open
outlets without local partners. Pavers Ltd., a British shoe
seller, was the first foreign retailer to get approval for full
ownership. Pavers, which has had a joint venture in India since
2008, expects to complete the purchase of its partner’s stake by
March and then run its own operations in the country.

The company plans to invest as much as $20 million over the
next 18 months, and have as many as 500 outlets by 2016, up from
142 today, according to Utsav Seth, the chief executive officer
of Pavers India operations.

“The business is growing more than 100 percent year on
year,” Seth said. “That’s a strong enough reason for
confidence to expand.”

The other two single-brand companies that have applied are
watch and jewelry seller Fossil Inc. and French cookware
manufacturer Le Creuset, according to India’s Department of
Industrial Policy and Promotion. Neither has been approved.

Mom, Pop

Marks & Spencer Group Plc. which has 24 stores in India,
says it won’t take advantage of the relaxed rules. The company
plans to open 10 new outlets in the next eight months through
its tie-up with billionaire Mukesh Ambani’s Reliance Retail.
“We’re happy with our partnership,” said Jan Heere, director
of international for the London-based company, which is
considered a single-brand retailer by India.

The government long said stricter rules for retailers
selling multiple brands were needed to protect small businesses.
While few of India’s hundreds of thousands of mom-and-pop stores
would face direct competition from the likes of IKEA, they could
lose many customers to the low prices and greater assortment of
a big-box discounter.

Then in September, the government reversed itself, allowing
multibrand retailers, saying their investments would help build
transportation and supply networks. Companies such as Wal-Mart
Stores Inc., once restricted to wholesale ventures in India,
were permitted to own as much as 51 percent of retail stores.
Despite the policy shift, no international multibrand retailers
have applied.

Regulatory Maze

Even with the relaxed rules, analysts say, a maze of
regulations and scrutiny from central and state government
departments has dimmed the enthusiasm of foreigners. Overseas
retailers will be required to invest a minimum of $100 million
in the country. At least half the investment must be in
manufacturing, distribution and warehouses, and they need to buy
a portion of their goods from Indian suppliers.

They also face infrastructure bottlenecks and bureaucratic
roadblocks. Asia’s third-biggest economy ranks 132nd among the
185 countries in the World Bank Group’s Doing Business index. It
is 173rd in terms of ease of starting a business, 182nd in
dealing with construction permits, 105th in getting electricity
connected and 94th in registering real estate.

“Something which needs to be delivered in one day is
delivered in two,” said Prashant Agarwal, joint managing
director of Wazir Advisors Pvt., a management consultancy in New
Delhi.

Bribery Investigation

Wal-Mart, which in 2007 established a wholesale operation
in collaboration with Bharti Enterprises Pvt. to supply
restaurants and local retailers, has faced recent setbacks. Last
month, the government said it is investigating allegations that
Wal-Mart made retail investments before the market was
officially opened. Wal-Mart, which says it is in compliance with
Indian laws, hasn’t applied to open a retail business.

The company in November said it had suspended some workers
at the Bharti Walmart Pvt. wholesale venture in a separate
inquiry into potential violations of U.S. anti-bribery laws.

Scott Price, head of Wal-Mart’s Asia operations, said in a
September interview that the company was considering a
partnership to set up retail stores with Bharti.

“India has a huge opportunity to improve its
infrastructure,” he said. “Modern retail is proven to help
that process.”

Awaiting Clarity

There isn’t enough clarity on foreign investment rules in
multibrand retail and it’s too soon for Wal-Mart to reveal
expansion plans, spokeswoman Arti Singh said on Dec. 28. The
retailer also needs to complete the internal investigations
regarding bribery and compliance, she said.

The difficulties ultimately help Indian companies that have
ventures with foreigners. Overseas retailers value domestic
companies’ experience, said J. Suresh, chief executive officer
of clothing retailer Arvind Lifestyle Brands Ltd., a unit of
Arvind Ltd., which has a joint venture with Tommy Hilfiger and
13 licensing arrangements with foreign apparel brands. More
foreigners are approaching him for tie-ups even though they are
allowed full ownership of local operations.

“Everyone feels that India is a very difficult market and
they need local expertise to succeed,” Suresh said. “There are
some 20 statutory authorities behind retail. We have to make
sure that we meet the law of the land. Then understanding the
Indian market, product and advertising knowledge is required.”